An economic research perspective on the green economy in the context of
sustainable development and poverty eradication

Key global challenges

According to the UNEP definition (2010), a green economy is ?one that results in improved
human well-being and social equity, while significantly reducing environmental risks and
ecological scarcities??.

Existing threats to the environment - directly and indirectly related to human activities - can
seriously affect socio-economic systems. These threats often intensify environmental and
socio-economic vulnerability, particularly in the poorest regions of the world, thus impairing
sustainable development and a balanced path towards a world green economy.
The relationship between growth, poverty eradication, the society, and the environment
shows complex dynamics and multifaceted dimensions, involving different systems and
sectors of production, and varied models of consumption, carrying out different economic,
environmental, and distributional impacts worldwide.
Even if it is often difficult to disentangle them, the following key challenges can be
identified, providing scope and guidance for research and policymaking.
· Climate change - Climate change is probably the most urgent and debated global
challenge, affecting many domains and cutting across other challenging issues. To
reach the ambitious 2° target accepted by the inter national community in Cancłn, it
is necessary to implement massive and timely mitigation policies globally, stabilising
GHGs emissions at the levels deemed consistent with the target by the scientific
community. Adaptation actions must also be planned and implemented, particularly
in the most vulnerable world regions that are already suffering from the effects of
climate change. From an economic perspective, key issues to tackle the climate
challenge are:

- The design of a more effective system for climate governance,
possibly leading to an international agreement on climate policies.

- A better understanding of the economic dimension of existing and new
mitigation instruments and technologies for climate stabilisation and
the overall economic valuation of alternative international climate
strategies, including the assessment of current governments?
pledges.

- The assessment of the full costs of climate change impacts and
adaptation, aiming to provide a comprehensive and integrated
assessment of climate impacts and policies, accounting for landuse,
forestry cover, atmosphere, biosphere modules, and other
complex feedback dimensions.

- The inclusion of uncertainty in the mutual responses of climate and
socio-economic systems.

- A clearer understanding of climate finance, investigating the nature,
(i.e. public vs. private), and the amount of financial efforts needed to
support the technological transformation towards a low-carbon
economy and to adapt to the impacts of climate change. The design of
an international carbon market, as well as the additionally of climate
funds, are two priority issues, which call for a strategic partnership and
cooperation between private and public finance.

· Energy - Energy is clearly intertwined with climate change, due to the fundamental
role played by energy in generating greenhouse gas emissions. In a world where
more than one billion people still live in energy poverty without access to clean
cooking facilities, access to energy is key to pursue poverty eradication and
sustainable development. While energy is crucial to feed the developing world and
the rapid economic growth of emerging economies, as well as to maintain the high
consumption standards in the developed world, a real technological ?revolution? in
the energy sector is needed to meet the climate challenge. Energy systems vary
widely across countries, given their level of development and their endowments of
primary energy sources. Crucial issues to be addressed in this area are:

- Energy poverty

- The affordability and security of energy supply

- The development of a reliable system for international energy
governance

- A better understanding of the drivers of energy demand, globally
as well as regionally

- A better understanding of the dynamics of innovation, diffusion,
and adoption of energy technologies

- A detailed representation of the energy systems at the country
level

- The environmental impacts of energy production and
consumption, including global warming and impacts on local air
pollution, land-use, and water utilisation
· Biodiversity - Biodiversity is a measure of the health of ecosystems and is in part a
function of climate, being thus directly affected by climate change. Biodiversity loss
potentially poses high damages to human health and well-being. Our well-being is
totally dependent upon the continued flow of ecosystem services such as: food,
fibres, clean water, healthy soil and carbon capture. These services are
predominantly public goods with no markets and no prices, and are rarely detected
by our current economic compass. Valuation efforts on ecosystem services are
often undertaken and available at the micro level. The key challenge is to scale up
from the micro to the macro dimension, to help policy makers understand the
economic value of ecosystems and assess the full benefits of alternative policies,
both at the global and local level.

· Land-use - Land is a scarce resource and competition in the use of land places
land-use at the centre of the climate-energy debate. The use of land indeed fulfils
basic needs, namely food security, feeds the growing appetite for cleaner energy
and supports forestry and sustainable forests practices. Bio-fuels and their
expansion contribute to cleaner energy production and compete with land-use for
food production. This competition is deemed responsible for the increased volatility
of food prices, with perverse economic effects particularly on developing
economies. Regarding forestry, reducing and/or preventing deforestation is one of
the mitigation options with the largest and most immediate carbon stock impacts in
the short-term at the global level. Proponents of bio-carbon sequestration activities
stress that land-use, land-use changes, and forestry (LULUCF) initiatives, if
properly designed can bring important multiple benefits to climate change
mitigation, biodiversity conservation, rural development, and poverty eradication in
developing countries. There are several important methodological issues regarding
the design of these initiatives including baselines, monitoring, permanence, and
insurance, which are still at the centre of the policy debate. Synergies and trade-
offs between these competing land-uses must be further studied and analysed in
an integrated way.

· Water - Water is also a scarce resource, precious to agriculture, forestry,
biodiversity, and more broadly, to the ecological balance, although rarely priced in
the market. Water will be directly affected by climate change since climate extremes
will lead to a higher frequency of droughts and flooding in various regions of the
world, and sea-level rise will severely damage coastal areas and small island
states. A more efficient and effective management of water resources and
coastal zones is needed. Furthermore, water should be included in the
integrated assessment of policies towards a green economy.

· Migration - Human migration induced by climate change is a potentially
relevant and massive phenomenon, affecting the socio-economic systems of both
sending and receiving regions. Direct effects of climate extremes in rural and
coastal areas, or indirect effects of climate change, such as diminished
opportunities in agriculture due to productivity losses, may trigger out migration of
labour, inducing rural-urban as well as international migration. A better
understanding of the socio-economic and environmental dynamics at play is crucial
to design effective policy answers.

Key methodological challenges

· Integrated assessment - Given the strong interdependencies described above,
socio-economic science must be able to provide an integrated assessment of the
key dynamics at play between the economy-energy-climate systems. The
integrated assessment should aim at capturing all the interactions across issues
and sectors, identifying potential synergies and trade-offs in order to guide effective
policies. Integrated assessment should account for land-use, forestry, water and
biodiversity, atmosphere and biosphere modules, human health and labour
migration.

· Full life cycle assessment - On the path to a green economy, the full life cycle of
economic activities should be assessed, accounting for external costs throughout
the whole production chain, to be able to compare the real net benefits of
alternative environmental policies.

· Welfare indicators - The quantitative measurement of a green economy should
move beyond GDP, capturing the three fundamental dimensions of sustainable
development, namely the economy, the society, and the environment, as well as
their potential trade-offs. Welfare indicators that move beyond the pure economic
dimension should become the benchmarking instruments for policy assessment,
bringing the equity perspective into the framework.

· Data consistency - Monitoring, reporting, verification, and consistency of data
across world countries and regions should be enhanced in many sectors key to
green growth. Often data are not reliable and not comparable.

· Dealing with uncertainty - Uncertainty is a central feature of climate science,
which inevitably, in the interaction between the climate and economic systems,
pervades several dimensions of future economic and development scenarios.
Uncertainty should be incorporated in the economic assessment of development
policies. More emphasis on the study of the probability of extreme events and
natural disasters may help to address climate uncertainty, outlining emergency
plans and doing contingency planning should worst-case scenarios occur.

Research input and policy insights for a world green economy from selected
ongoing FEEM research projects

Research inputs

· Over the years FEEM has developed and refined robust modelling tools
addressing both mitigation and adaptation policies to advance knowledge in the
economics and policy of climate change. These modelling tools aim to fill the
existing gaps and address the key challenges previously identified in this area of
research. On the mitigation side, FEEM has built the energy-economy-climate
WITCH model (World Induced Technical Change Hybrid Model). WITCH is
specifically designed to assist in the study of the socio-economic dimensions of
climate change and to help policy makers understand the economic consequences
of climate policies. On the impact side, FEEM investigates climate change impacts
on the world economy through the use of ICES (Intertemporal Computable
Equilibrium System), a model designed to assess the final welfare implication of
climate change impacts, capturing the production and consumption substitution
processes at play in the social-economic system as a response to climate shocks.
Essentially focused on modelling and policy analysis, the following selected projects
aim at assessing the full costs of climate change impacts and adaptation, and of
existing and new mitigation instruments and technologies for climate stabilisation, in
order to provide a comprehensive integrated assessment of climate polices. Within
the same modelling frameworks some of the projects highlighted also investigate
the issues of climate and energy policy governance and climate and energy-related
innovation and technological change:

· With the aim to provide a useful tool to measure welfare beyond-GDP, FEEM has
developed the FEEM Sustainability Index (FEEM SI). The FEEM SI is an
aggregate index through which novel techniques summarise and merge the
information derived by a selection of relevant sustainability indicators to assess
welfare. Thanks to its foundation in a recursive-dynamic computable general
equilibrium model, ICES-SI, the FEEM SI can provide future assessment of
sustainability as well as a past one, building a dynamic and comprehensive picture
of the sustainability of world countries through time. Since it is possible to compute
the index under different economic, social, and environmental assumptions, the
FEEM SI can be used to assess the sustainability of alternative policies of
economic, social, or environmental in nature, both in a snapshot and through time.
A new version of the FEEM SI will be released in December 2011, presenting
several methodological advancements, among which, a novel indicators?
aggregation methodology based on experts? elicitation techniques.

· Building on earlier work on the design of a methodology to assess the external
costs of energy (the ExternE project series), FEEM has followed up on this stream
of research leading the EXIOPOL project - A New Environmental Accounting
Framework Using Externality Data and Input-Output Tools for Policy Analysis. The
main research products of this project include: a detailed Environmentally
Extended Input-Output database, covering 43 individual countries plus the
aggregation of the rest of the world, to perform full cost accounting and impact
assessment of different activities; policy relevant case studies; and the comparison
of different methodological approaches to environmental accounting. EXIOPOL thus
provides precious tools and data for a comprehensive analysis and a full life cycle
assessment of a broad set of economic activities in Europe.

· To bring a more realistic view into modelling and in the design of future scenarios,
FEEM has initiated a research stream on the development and application of
experts? elicitation techniques. Within the ICARUS project, aimed to provide a
unique analysis of energy related innovation mechanism, expert elicitation methods
will be used in order to assess the potential effectiveness of technology-specific
R&D. ICARUS carries out a systematic process of collection and elaboration of
qualitative and quantitative estimates from the experts, drawn from the world of
business and institutions. This process characterises the uncertainty dimension of
innovation in selected technologies, including Solar PV and CSP technologies,
nuclear, and bio-fuels. Expert elicitations? results will be used as building blocks to
shed light on a number of disguised areas relevant for the modelling community,
improving the models capacity to project a more realistic image of the world. The
same methodology will be used within the TEaM Project -Technology Elicitations
and Modelling Project. The project aims to integrate the data sources on technology
supply, with expert elicitation techniques and to share them with the Integrated
Assessment Modelling community.

· To enhance communication and cooperation among the different communities
involved in sustainable development issues, FEEM is involved in several research
networks. As an example, FEEM leads the dissemination activities of the Network
of Excellence LIAISE- Linking Impact Assessment Instruments to Sustainability
Expertise, aimed to build a bridge between science and policy in the field of impact
assessment for sustainable development. Among the various activities of the
network, a toolbox on available instruments for impact assessment has been
designed and made freely accessible to practitioners working in the field.

Policy insights

· An integrated assessment approach in economic research aims at enhancing
harmonised and integrated policies towards a world green economy. Policies
should be harmonised not only across sectors, but also around the most
challenging issues, such as climate change. The system of governance of the
relevant policies should allow for integration and cooperation at the regional and
international levels.

· To pursue a green economy approach, the assessment of development policies
should move beyond GDP, by benchmarking new measures of welfare. ?Beyond
GDP? indicators should account for environmental and social externalities of
economic activities, reflecting the concept of social equity.

· The modelling of the transition to a low-carbon green world, under multifaceted
dimensions of uncertainty, requires a long-term perspective. Based on the outcome
of research, policy recommendations also require a long-term horizon. Policy
makers should start adopting a longer-term perspective, implementing
policies that may become effective beyond their political lifetime.

· Policy should communicate more effectively to science, to the business
sector, and to the civil society to involve all key stakeholders in the difficult path
towards a green economy. Efforts from both the demand and supply side are
absolutely necessary. Only a productive cooperation between science and policy
can build and provide the right incentives and motivations along that path,
communicating also through the media.

· Policy should be aware that a public-private alliance is desirable to address more
effectively many of the key challenges identified such as: climate finance, the
support to R&D investment in new energy technologies, the implementation of full
life-cycle assessment analysis in many economic sectors, and the more efficient
management of natural resources such as: water, biodiversity, and ecosystem
services.